Brokerage firm Anand Rathi has adopted a cautious stance on India's midcap IT sector for FY27, citing slower growth and rising costs. Recent Q1FY27 data reveals a drop in median revenue growth and operating margins. While some companies show strong contract wins, investors are watching how these firms manage deal execution and profitability amid global economic uncertainty.
Anand Rathi Shares and Stock Brokers has expressed a cautious view regarding India's midcap IT sector for the current fiscal year. The brokerage firm suggests that companies in this space will likely see muted revenue growth as they navigate challenges such as delays in project start times and pressure from new artificial intelligence tools which are making services cheaper.
Q1FY27 Performance Trends
The financial results for the first quarter of FY27 highlight the current difficulties facing the sector. Median revenue growth for midcap IT companies slowed to 2.1% year-on-year, a notable drop from the 3.8% growth recorded in the final quarter of FY26. Additionally, operating profit margins—the money left over after basic business expenses—also thinned, falling to 14.7% from 15.9% in the previous quarter.
Several factors contributed to this pressure on profits. Companies faced losses from fluctuations in foreign currency exchange rates and hedging costs. Additionally, many firms had increased their hiring in anticipation of higher demand that did not fully materialize, leading to higher staffing costs that were not offset by revenue growth.
Varying Results Among Companies
While the sector average remains weak, some companies have managed to maintain strong deal momentum. Persistent Systems reported a record quarterly total contract value of $1.15 billion. However, even with strong contract wins, the company’s net profit for the first quarter fell 8.7% compared to the previous quarter, largely due to losses from foreign exchange movements. Mphasis continued to see success, reporting contract wins exceeding $400 million for the fifth consecutive quarter.
On the other hand, the sector is also dealing with specific regional and industry weaknesses. Geopolitical instability in the Middle East has affected spending in that region. Furthermore, the automotive-focused engineering segment has faced slowdowns, with companies like KPIT reporting a sequential decline in revenue due to program delays among European vehicle manufacturers.
Outlook for Investors
Business Process Outsourcing firms, such as Firstsource, have shown more stability, maintaining their revenue growth guidance. However, for the broader midcap IT sector, the ability to convert signed contracts into actual revenue will be the primary test for the remainder of the fiscal year. Investors are looking for signs that these companies can manage their costs effectively and successfully deploy their technology services as clients increase their AI and data center budgets.
The most important monitorable for shareholders will be how companies manage their margin recovery in the coming quarters, particularly as they balance the need for new technology investments with the pressure to maintain profitability. Whether these firms can improve their execution speed and navigate the current pricing environment remains a key factor for future performance.